Being a landlord won’t make you rich, but if managed properly as a business venture, it can certainly make you money. Anyone spreading the idea of rental properties as a get-rich-quick scheme is selling exactly that: a scheme. Owning Ontario rental properties offers a solid long-term return in slow building of equity in a property. If you have a bit more money to invest than the average person and can purchase an apartment building, commercial properties or multiple properties, it can be a wealth builder; but you have to have the wealth to start with.
If you are looking for a single property to generate significant income, you’re looking at it the wrong way – rents are often just a little above the mortgage on the property, and that extra should be put into a fund to account for major repairs or having the property sit vacant for a few months. Once the property becomes mortgage-free, or close to it, you can look at expanding your rental property portfolio – but not before.
The landlord money ladder
People who do make a significant amount of money off of Toronto property rental usually own multiple properties, but to get into that game you need significant capital to start off with. The usual path to success starts with one property that is rented out, and it can take time to build enough capital to buy another property once that property starts making money. Many landlords are content with the idea of having a tenant pay down the mortgage on a property instead of them, building long-term value.
If you want to get into leveraging multiple properties, you have to be absolutely sure that you have enough of a cash cushion to do this. The general rule is that you should always be able to pay taxes, the mortgage and relevant utilities on a property that is vacant for at least a few months, as well as cash for major repairs and/or appliance replacements if you do have a tenant. If you don’t have that money in the bank, don’t buy a second property, because with the second property comes double the risk of not having a tenant. You should also have another source of full-time income if you only have one or two properties.
Be cautious when borrowing
It is very important to not over-leverage yourself, especially in the face of potentially rising interest rates. As mentioned, you should have your first rental property – and ideally your primary residence – either most of the way to paid off or paid off before you look at a second rental property, especially if you have an average household income. If you’ve had an especially good year with your career and tenants, it can be tempting to start borrowing too soon for a second rental property. Don’t fall into the trap of “I make $xx, therefore I can do this.” This is almost always wrong. You need to account for lean years, the possibility of not having a tenant for a few months or longer, and financial hits like a job loss or an illness.
Setting the right rate is important
The importance of setting the right monthly rate for your property can’t be overstated. It’s better to go high than low, and drop the price if you aren’t getting interest from potential tenants. Raising rents is strictly controlled by the Ontario Landlord and Tenant Act, so if you have a long-term tenant and you lowball the price, you’re out of luck until they leave.
To set your rent rate, look at what similar size properties are renting for in the immediate area – ideally you’ll want to do this before you buy the property to determine if it is a good investment. The usual rule of charging 1% of the current market value of the property may be unreasonable in the current Toronto real estate market, but may be applicable to properties in the GTA.
Property management companies are great partners
Property management companies do cost money, but they can pay for themselves in many ways – ensuring you don’t get the wrong tenants, finding good contractors for repairs in an emergency, and handling day-to-day concerns so you can focus on your career while your long-term rental property investment is being taken care of by them.
Unfortunately, being a landlord will not make you rich overnight, or even in the long-term. There may be times when it actually drains your cash reserves to pay for repairs or the mortgage on the property if you don’t have a tenant. But it will create long-term wealth in the form of equity on a property, and in that sense it can be more secure than playing the stock market. Find a good partner like Highgate to manage your property, and you can be a landlord without the usual headaches that go with being a landlord in Ontario.
